Thank You

Error.

"All animals are equal, but some animals are more equal than others," George Orwell famously wrote in his allegory on totalitarianism, Animal Farm.

Mammoth banks have been more equal than others for some time. Ever since the bailout of Continental Illinois, which, in an ironically Orwellian twist, took place in 1984, megabanks have been deemed "too big to fail" because of the feared impact of the failure of any one big link in the financial daisy chain.

After all, one institution's liabilities are the assets of others, the realization of which can spread a run on one to the entire system. The recent financial crisis made the implicit backing of too-big-to-fail institutions explicit with the passage of the Troubled Assets Relief Program, which originally slated $700 billion of taxpayer money to be invested in banks and other institutions.

But the bailouts have left the bankers who caused the crisis largely blameless, which last week puzzled Senator Charles Grassley, the Iowa Republican who has long had an interest in financial matters. In a hearing of the Senate Judiciary Committee on Wednesday, he expressed concern to Attorney General Eric Holder that some institutions had become "too big to jail," even
HSBC
(ticker: HBC), the U.K.-based bank that agreed last year to a record $1.9 billion penalty to settle money-laundering charges.

According to the transcript of the hearing: "I don't have a recollection of [the Department of Justice] prosecuting any high-profile financial criminal convictions in either companies or individuals. Assistant...Attorney General Breuer said that one reason why DOJ has not brought these prosecutions is that it reaches out to, quote-unquote, experts to see what effect the prosecutions would have on the financial markets."

In a stunning response, Holder agreed: "The concern that you have raised is one that I frankly share. And I'm not talking about HSBC now, because that may not be appropriate. But I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy. And I think that is a function of the fact that some of these institutions have become too large."

In other words, the nation's chief law-enforcement official admitted the decision to prosecute depends not on the law, but the impact on the financial markets and the domestic and global economy from these megabanks.

While Holder's admission might give new impetus to legislation to break up the banks, it is unlikely to get anywhere. After all, the big banks could point to their healthy scores last week on the latest "stress tests," which critics suggest aren't stressful enough. Of the 18 biggest U.S. banks, only Ally Financial, the former GMAC, which still is a ward of the state, failed the stress test. The main criterion was that the banks still had a 5% buffer of primary capital, even after a set of hell-or-high-water catastrophes, including a 50% drop in the stock market, a decline of more than 20% in the housing market, and an unemployment rate of 12.1%. So, even if these banks are bigger than they were before the 2007-09 near meltdown, they are at least better capitalized.

That these banks could survive such dire circumstances owes a lot to the capital that regulators forced them to raise. But due credit ought to be paid to the Fed's policies of holding short-term rates near zero and its bond purchases, which have combined to restore the health of the credit markets, pull the housing market out of its tailspin, and boost other asset prices, not the least pushing the Dow Jones Industrial Average to a record last week.

This recovery raised households' net worth by some $1.17 trillion in the fourth quarter, to $66.07 trillion, the highest since 2007, just before the housing meltdown, according to data released last week by the Fed. That's all good news. But not if it's perceived to be the result of action by a government of the banks, by the banks, and for the banks.

OUTRAGE IS MUTED by a rising stock market and a falling unemployment rate. The Dow last week finally topped its October 2007 peak and added 307 points, or 2.2%,to set a fresh high-water mark of 14,397.07 by Friday's close. Helping to spur the advance was news of a larger-than-expected 236,000 gain in nonfarm payrolls, half-again the consensus guess for the key number. In addition, the unemployment rate ticked down by 0.2 of a percentage point, to 7.7%, but that's still far from its 4.7% reading when the Dow set its previous high nearly 5½ years ago.

Philippa Dunne and Doug Henwood of the Liscio Report note that the household survey (from which the unemployment rate is derived) showed that full-time employment fell by 77,000 while part-time payrolls increased by 365,000, although not for economic reasons. Still, Dunne and Henwood note progress. At February's pace, all the recession job losses would be recouped in just 13 months. At the average rate of the past six months of payroll growth, it would take 16 months. Good news for job seekers, potentially less so for financial markets. The Fed has indicated its intention to stick to its current quantitative easing, consisting of buying $85 billion a month—roughly $1 trillion a year—of Treasury and agency securities until the unemployment rate reaches 6.5%.

Fed Chairman Ben Bernanke and Vice Chairman Janet Yellen emphasized in respective speeches that the central bank isn't about to throttle back its bond buying anytime soon, even as the recovery in the job markets progresses. As good as these expansionary moves make market participants feel, "the Fed's dogged commitment to these policies has Faustian consequences for the Fed and simultaneously puts investors in a sort of double bind: All protagonists swept up in QE and its effects are damned if they do, or damned if they don't," according to RBS's U.S. Credit Strategy Weekly. "Investors can continue to merrily buy reflating assets even as they know—deep down—there will be an eventual day of reckoning when interest rates rise."

Adds Lena Komileva, at g+economics in London, "You can either believe the stock market or the Fed, but not both." A reversion of U.S. interest rates to more normal levels and a dollar bull market—as was evident in the past week—would mean the " 'sweet spot' for U.S. equities is coming to an end." This, she writes, should lead investors to seek more attractive opportunities in other stock markets.

BERKSHIRE HATHAWAY
pays little to its board members and provides them no legal protection in the form of directors' insurance, but a nomination to its board is a coup because it amounts to an endorsement by CEO Warren Buffett and offers regular access to him.

On Friday, Berkshire announced that Barron's Roundtable member Meryl Witmer, 51, is set to join that exclusive club after Berkshire's annual meeting on May 4. Here's our colleague Andrew Bary's report:

Berkshire (BRK.A, BRK.B) looks for directors with "very high integrity, business savvy, an owner-oriented attitude, and a deep genuine interest in the company," according to its 2012 proxy. That's exactly what companies should seek, but often don't find as they pack boards with compliant friends of the chief executive. "She meets all the qualifications for a perfect director," Buffett wrote of Witmer in an e-mail to Barron's.

Witmer won't be joining the board for the money. Berkshire pays directors just $900 per meeting attended in person and $300 for a meeting attended by telephone. But she will likely be involved in one of Berkshire's most important decisions: naming a successor to Buffett, 82. Witmer couldn't be reached for comment on Friday.